Tech ETFs recoup February losses, and then some

Mar 15th, 2018 | By | Category: Equities

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One sector has more than recouped its losses from February’s volatility. Technology has stormed ahead over the past month; 12 of the 15 top-performing London-listed ETFs over one-month track a tech-based index.  

Cutting-edge technologies support the growth of the sector

Adoption of cutting-edge technologies is supporting the performance of the tech sector.

The db x-trackers MSCI USA Information Technology Index UCITS ETF (DR) (XUTC LN) is up 9.69% over one month (12 February 2018 – 12 March), and the iShares S&P 500 Information Technology Sector UCITS ETF USD (Acc) (IUIT LN) is up 9.54%.

Other high performers include the PowerShares EQQQ Nasdaq-100 GBP Hedged UCITS ETF (EQGB LN), which returned 9.25%, and the db x-trackers MSCI World Information Technology Index UCITS ETF (DR) (XDWT LN), returning 9.25% over the month.

The Nasdaq 100 Index, of which roughly 60% is tech stocks, has returned 9.60% year-to-date (as at 15th March 2018), significantly higher than those indices with less of a tech focus; the Dow Jones Industrial Average has returned 0.16% year-to-date and the S&P 500 2.84%, also year-to-date.

This is on the back of an immensely impressive 2017 and half-decade for technology stocks. In 2017, the tech segment of the S&P 500 posted a 38% return, while the broader S&P 500 gained 22%. Perhaps even more impressive is the fact that technology is responsible for almost 30% of the total gains of the S&P 500 over the last five years.

This outperformance can be attributed to a number of different factors. Adoption of cutting-edge technology has surged in recent months with the growth of virtual reality headsets, driverless cars and blockchain to name but a few. FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) have been boosted by these new technological developments.

Trump’s tax reforms have also been met with a positive reception from the industry due to its fondness for holding cash overseas, and the general pick-up in the economic environment will benefit more economically sensitive growth sectors, such as tech. Consumer confidence is at its highest level since 2001, lending the tech sector support from both business and the consumer. The global economy is starting to gather momentum and tech companies are likely to benefit.

But, as Chris Dhanraj, Head of the ETF Investment Strategy team at iShares, notes, “In investing, past is not prologue… the question is: Can the good times roll on?”

Dhanraj says that while we may not see another year like 2017, there are three reasons why technology continues to be one of his top sector picks. “We believe earnings momentum, strong balance sheets and economy-wide transformational forces of innovation and disruption can help provide both cyclical and structural support for technology stocks in 2018,” said Dhanraj.

Brad Sorensen, Managing Director of Market & Sector Analysis at Schwab Center for Financial Research (part of broker and ETF issuer Charles Schwab) is similarly bullish. He has given the sector an ‘outperform’ rating.

Sorensen commented: “Central to our outperform rating is the evidence that appears to show companies have underinvested in technological improvements during the past several years. This can only occur for so long if companies want to remain competitive in this global environment, and we believe we are now at the point where they need to upgrade equipment.”

Denise Chisholm, Sector Strategist at Fidelity, the investment giant and ETF issuer, commented along similar lines: “[Historical analysis implies] that certain procyclical sectors may have higher odds of outperformance. They include financials, technology, industrials, and consumer discretionary. These sectors were leading the market prior to the pullback and kept leading during the correction, so their valuations relative to the rest of the market increased.”

She went on: “These four sectors all have fundamental drivers that historically have been associated with strong relative returns. Technology – leading indicators suggest expanding margins.”

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